Legal and Ethical Issues in the Bishop Estate Scandal

by Randall W. Roth

In 1884 Princess Pauahi Bishop, the last acknowledged descendant of the Hawaiian monarch Kamehameha, placed the bulk of her land in charitable trust to establish and maintain two schools, “one for boys and one for girls … called the Kamehameha Schools.” The trust corpus—known as Bishop Estate—has been described by The New York Times as “a feudal empire so vast that it could never be assembled in the modern world,” and by The Wall Street Journal as “the nation’s wealthiest charity.” In 1997 four elders revered in the native Hawaiian community and University of Hawaii professor Randall Roth alleged massive trust abuse by the state’s most powerful people—among them judges, business executives, and legislators. Then, as described in a book review of Broken Trust: “Subpoenas fly, surveillance photos are snapped, phones are bugged, tires are slashed, judges cry in court, suicide factors in.” All five members of the state Supreme Court recused themselves from Bishop Estate matters, key legislators and others received prison sentences, and the IRS forced the removal of all five trustees. The following is an alphabetized list of selected ethical and legal issues from that period:

ATTORNEY-CLIENT PRIVILEGE. Few courts outside of California allow trustees to use the attorney-client privilege to withhold important information about trust administration from the beneficiaries of private trusts, or from the attorney general with respect to charitable trusts. Yet the probate court ruled that the Bishop Estate trustees could use the privilege to withhold documents from Hawaii’s attorney general.

ATTORNEY GENERAL’S “CONFLICT OF INTERESTS.” Bishop Estate trustees argued in court that the attorney general’s responsibility to protect charities (as parens patriae) conflicted with her tax-collecting duties (as in-house counsel for the state Department of Taxation). The trustees’ lawyers asked the judge to disqualify the attorney general because of this “conflict.” They also charged that the attorney general acted improperly by simultaneously heading up the civil and criminal investigations of the trustees. These matters were never finally resolved; they ceased to be relevant when the parties entered into a global settlement agreement.

CO-INVESTMENT. Bishop Estate trustees created a conflict of interests when they invested personal funds in private business deals in which they had also invested trust funds. One reason for the restriction on co-investing is that trustees will be tempted to consider their own interests when making subsequent decisions about the investment (i.e., that they will throw good money after bad for the impermissible purpose of salvaging their own private investment). Bishop Estate trustees apparently did exactly that.

COMMUNITY INTERESTS. Trustees of charitable trusts traditionally have been expected to pursue each trust’s specific charitable mission, even to the detriment of other community

1 interests. That may be changing. In 2002 the trustees of the Hershey trust voted to sell the Hershey Foods Corporation for $12.5 billion so they could diversify trust investments and increase dramatically the money available to pursue that trust’s educational mission. The Pennsylvania attorney general and probate court refused to agree, however, because of opposition from community leaders who feared that the new owner would move company headquarters and operations out of the state. Also in 2002 the new Bishop Estate trustees yielded to public pressure and withdrew from a long-standing legal battle over the trust’s right to divert mountain stream water for land-development purposes. Although this decision arguably hurt the trustees’ ability to educate as many children as possible, Hawaii’s attorney general and a court- appointed master supported the decision.

COMPENSATION FROM OUTSIDE SOURCE. Trustees may violate the duty of loyalty by accepting compensation from a source other than the trust estate for acts done in connection with the administration of the trust. Yet Bishop Estate’s lead trustee for asset management placed himself on the boards of trust-controlled companies and collected large director fees in addition to $1 million in trustee fees. A more appropriate arrangement might have been to reduce the trustee fees so that the total compensation (i.e., fees received from the trust estate plus fees from trust-controlled corporations) would not exceed the value of that trustee’s services on behalf of the trust.

CONFIDENTIALITY. Fiduciaries are sometimes subject to a duty of confidentiality. Bishop Estate trustee Lindsey claimed that trustee Stender had such a duty and then violated it when he told friends, and eventually reporters, about what went on at trustee meetings. Stender claimed that Lindsey violated a duty of confidentiality when she released to the media her “confidential” report on the quality of education at Kamehameha Schools.

CONFLICT OF INTERESTS. Trustees must avoid conflicts of interest and take appropriate action when a conflict cannot be avoided completely. A Hawaii statute sometimes requires more: “If the duty of the trustee and the trustee's individual interest … conflict in the exercise of a trust power, the power may be exercised only by court authorization … upon petition of the trustee.” Yet Bishop Estate trustees often devised their own ways of dealing with conflicts, sometimes with astonishing results. On one occasion, trustee Peters “recused” himself as a Bishop Estate trustee just long enough to negotiate for the purchase of Bishop Estate land on behalf of the buyer.

COOPERATION. Co-trustees are required to work together in the best interests of the trust, yet Bishop Estate trustees sometimes refused to share important trust information with each other, and their working relationships became strained to a point of physical violence.

CRITICIZING JUDGES. Lawyers are allowed to criticize judges, but there are limits. Hawaii’s Supreme Court justices complained that the authors of the Broken Trust essay had “expressly and impliedly impugned the integrity, honesty, ethics, intelligence, qualifications, competence, and professionalism not only of the five members of the Hawaii Supreme Court as individuals, but also of the court as an institution.” These same justices were the ultimate authority on matters of lawyer discipline, yet they never took action against the lawyers who signed the Broken Trust essay.

CY PRES. A trust’s charitable mission can be changed legally only by showing that unforeseen circumstances have made the original mission illegal, impossible, impracticable, or wasteful. The standard is less stringent when the change would affect only an administrative provision (i.e., one that is a means to an end as opposed to the end itself). Bishop Estate trustees and Hawaii’s probate court sometimes have acted as if this rule does not exist. For example, in addition to maintaining the Kamehameha Schools, the trust functions like a land conservancy, providing culturally and environmentally sensitive stewardship for nearly 360,000 acres of non- income-producing land. Mrs. Bishop’s will says nothing about preserving the environment or Hawaiian culture.

DELEGATION. Each trustee must remain responsible for, and exercise supervision and review of, all trust activities. Despite this rule, the Bishop Estate trustees utilized a “lead-trustee” system in which individual trustees functioned like chief executives for different aspects of the trust’s activities, making important decisions without first consulting with the others.

DILIGENCE. Trustees have a duty to stay informed and to participate in trustee decision making. Yet one trustee stopped attending meetings because he considered the chaotic sessions a waste of time. He also felt that he could not influence the outcome of any issue because the other trustees ignored or ridiculed what he said. Even so, his failure to attend was a serious breach of trust.

DISCOVERY ABUSE. When engaged in litigation, it is unethical for a lawyer to make frivolous requests for documents or fail to make reasonable efforts to comply with proper requests from an opposing counsel. Yet studies show that lawyers frequently seek more documents than they need and go to great lengths to avoid turning over embarrassing or damning documents that the opposing party has requested. Hawaii’s attorney general complained that the Bishop Estate trustees’ lawyers often failed to provide key documents, but at other times would provide an “avalanche” of seemingly unimportant documents. She asked the court to sanction those lawyers for abusive discovery tactics, but the judge chose not to do so.

DISCRIMINATION. Mrs. Bishop’s will does not limit school admission to native Hawaiians, but it does authorize the trustees to set the admissions policy and to use a portion of each year’s income for “support and education of orphans, and others in indigent circumstances, giving the preference to Hawaiians of pure or part aboriginal blood.” With minor exceptions, Bishop Estate trustees have always reserved admission to Kamehameha Schools for children who have Hawaiian blood. Some critics argue that applicants with a relatively high quantum of Hawaiian blood should gain admission over those with lower levels, regardless of academic ability. Others maintain that any child who has been informally adopted by a Hawaiian (a cultural practice known as hanai), should be eligible to attend Kamehameha Schools. And then there are those who argue that “Hawaiianness” should be based on culture and interests, not blood quantum or informal membership in a Hawaiian family. A non-Hawaiian applicant, rejected by Kamehameha Schools in 2002, challenged the Hawaiians-only admissions policy in federal court, arguing that it violates a civil-rights statute; the plaintiff initially won (2-1) at the 9th Circuit, then lost (8-7) in a rare en banc rehearing. Before the matter could be taken up by the U.S. Supreme Court, the trustees paid the plaintiff $7 million to end the matter. The IRS district

3 office had decided in 1999 to revoke Bishop’s Estate tax-exempt status because of its Hawaiians- only admissions policy, but the national office reversed that decision. To reduce the risk of a 14th Amendment challenge, the trustees have reject all forms of government aid and avoid managerial involvement in public charter schools.

DIVERSIFICATION. It has been said that the three most important principles for prudent investing are “diversification, diversification, and diversification,” yet the Bishop Estate trustees retained most of the original estate, which was virtually all unimproved land. Depending on other factors, this could conceivably be prudent and therefore acceptable under trust law, but the Bishop trustees’ periodic additions to the trust’s already extensive land holdings are virtually impossible to justify under the prudent investor standard.

DUE DILIGENCE. Trustees are not allowed to make uninformed investment decisions. They must perform appropriate due diligence before investing trust funds. Bishop Estate trustees sometimes skipped that step or appeared not to take it seriously.

DUTY TO PROTECT. Each co-trustee has a duty to use reasonable care to prevent any co- trustee from committing a breach of trust and, if a breach of trust occurs, to obtain redress. Trustee Stender knew of serious breaches and considered filing a lawsuit, but lawyers told him it would cost at least $2 million of his own money, and that he would probably lose - because of a perceived connection between his co-trustees and the state judiciary. He was later faulted for not filing suit against the other trustees.

FIDUCIARY DUTIES. When individuals agree to serve as trustees—which they cannot be forced to do—they automatically become subject to strict fiduciary duties, regardless of their understanding of those duties. Even so, four of the five Bishop Estate trustees declined to attend sessions on what was expected of them under trust law.

FLAWED ACCOUNTABILITY. According to the IRS and several court-appointed masters, Bishop Estate trustees treated Mrs. Bishop’s estate like their personal investment club and set what some experts have called a “world record for breaches of trust,” yet the Hawaii probate court allowed all five trustees to resign without ordering them to pay any surcharges, damages, or reimbursement to the trust—they were not even required to admit they had done anything wrong.

HIRING PRACTICES. Fiduciary duties limit a trustee’s freedom to provide patronage. Hiring such friends and relatives is not an automatic violation of fiduciary duties, but trustees should proceed cautiously and openly, with a goal of inspiring trust and confidence. According to the IRS and the state attorney general, however, Bishop Estate trustees regularly retained and paid large amounts to such people, with no apparent concern about having to account for such decisions.

IDENTIFYING THE CLIENT. Lawyers being paid with Bishop Estate funds sometimes claimed to be representing the five individual trustees in the trustees’ fiduciary or representative capacity; at other times the lawyers said they were representing “the trust,” as if a trust were a separate entity; and on a few occasions they identified the majority faction of the board of

4 trustees as their client. The difference is more than semantics. Lawyers have a duty to represent the interests of each client to the fullest possible extent of the law. When the interests of individual clients begin to diverge, problems arise for lawyers who supposedly represent them all. For example, the duty of confidentiality owed to one client may be impossible to reconcile with a duty to communicate fully with another client. Eventually, two courts in Hawaii determined that these lawyers at all times had five separate clients, the trustees.

IMPARTIALITY. Trustees are required to know whether the circumstances of any particular trust require them primarily to stabilize current returns, maintain the trust estate’s real value, or something else. They cannot put the interests of future generations of beneficiaries ahead of the current generation. While Kamehameha Schools was admitting only one out of every twelve applicants, Bishop Estate trustees were investing primarily for growth and secretly accumulating more than $350 million of income.

INCORPORATION. Broken Trust author Judge Samuel King suggests that it is time to convert Mrs. Bishop’s trust into a not-for-profit corporation. As envisioned by King, instead of five highly paid trustees who tend to micromanage, there would be a significantly larger number of unpaid directors who would limit themselves to setting policy and providing oversight to a well-paid chief executive and highly qualified staff. Because unpaid directors of not-for-profit corporations have far less legal exposure than do trustees of a trust (by statute in most states), millions of dollars could be saved on liability-insurance premiums. Also, the organization’s charitable mission could evolve more easily with changing times. For example, a not-for-profit board of directors could legitimately decide to use existing resources to promote Hawaiian culture, conserve non-income-producing land, grant scholarships to Hawaiian students at schools other than Kamehameha, and expand the organization’s outreach programs, all without first having to establish that the charitable purpose in the will (the maintenance of two schools) is illegal, impossible, impracticable, or wasteful.

INTERIM REMOVAL. Despite reports submitted by a court-appointed master and court- appointed fact-finder that listed numerous serious, ongoing breaches of trust, the probate judge declined to take definitive action until the IRS made its presence felt, which was nearly two years after publication of the “Broken Trust” essay. When the judge finally did schedule an interim-removal hearing, a trustee who had attempted suicide requested and received a postponement so he could recuperate fully before having to protect his individual interests in court. Meanwhile, he continued to collect nearly $100,000 each month in trustee fees. The probate judge appeared to be more concerned about that trustee’s due-process rights than the interests of the trust itself.

INTERMEDIATE SANCTIONS. Bishop Estate trustees spent nearly $1 million lobbying against the enactment of an intermediate-sanctions law that empowers the IRS to impose large fines on trustees for taking “excess benefits,” such as excessive fees. Because its enactment posed a threat only to the trustees (and provided benefits to the trust itself), the trustees’ lobbying would have been a serious breach of trust, even if they had used their own money. They used trust funds.

INVESTMENT OPPORTUNITIES. After the other Bishop Estate trustees rejected a recommendation that they acquire control of Maui Land & Pineapple Company on behalf of the trust, trustee Stender pursued the opportunity for his personal account. Trustee Lindsey described this as a disloyal act even though Stender fully reimbursed the trust for the time its staff had spent while investigating the opportunity on behalf of the trust. Lindsey’s attorney expressed less certainty about the propriety of Stender’s actions: “Whether or not Stender engaged in a breach of his fiduciary responsibilities … is inconclusive at this time.”

IRS ROLE. Historically, the IRS has played a limited role in regulating charities, deferring almost completely to local officials. But the slow-moving Bishop Estate controversy reached a sudden climax when the IRS refused to communicate with the sitting trustees and threatened to revoke the trust’s tax exemption if a list of nonnegotiable demands were not met. That forced the probate court to remove the trustees and reform the trust. Was it proper for the IRS to assume such an active role? Opinions vary greatly.

JUDICIAL ACCOUNTABILITY. Judges must adhere to a set code of ethics, and they are supposed to be held accountable when they fail to do so. In Hawaii, a Judicial Conduct Commission is responsible for reviewing alleged misconduct by judges; and a Judicial Selection Commission has the power to deny a judge another term on the bench. Yet neither of these bodies (nor any of the other potentially appropriate groups) looked into allegations of judicial misconduct related to Bishop Estate.

LACK OF TRANSPARENCY. On paper, the Hawaii Supreme Court supports a policy of openness: “Secrecy of judicial action can only breed ignorance and distrust of courts and suspicion concerning the competence and impartiality of judges. Thus, the openness which serves as a safeguard against attempts to employ our courts as instruments of persecution also serves to enhance public trust and confidence in the integrity of the judicial process. Such trust and confidence is a vital ingredient in the administration of justice under our system of jurisprudence.” Despite this clearly stated policy, judges in the Bishop Estate controversy sealed many key records. The replacement trustees also claim to have a policy of openness, yet they have steadfastly refused to make available to the public key documents. Even the office of the attorney general has refused to share any document that is not already in the public realm.

LAWYER WHISTLEBLOWING. Depending on the circumstances and local rules, trust counsel may be prohibited from disclosing a trustee’s serious misconduct (as was the rule in most states for many years), required to disclose any such misconduct (as is the law today three states, including Hawaii), or permitted to disclose it (as is the national trend). Despite a “world record for breaches of trust,” Bishop Estate lawyers apparently never reported misconduct of a Bishop Estate trustee.

MANDATORY AND PRECATORY LANGUAGE. Mrs. Bishop used mandatory and precatory language in different sections of her will. For example, she directed that her trustees expend annual income on the schools, publish accountings in a Honolulu newspaper, and hire only Protestants to teach at Kamehameha Schools. By comparison, she only expressed a desire that the trustees provide education in the common English branches, and that instruction in the higher branches always is subsidiary. Bishop Estate trustees frequently refer to Mrs. Bishop’s

6 will as “sacred,” yet they regularly have deviated from not just the precatory provisions, but mandatory ones as well.

OVERSIGHT. Effective oversight is never certain. Each individual Bishop Estate trustee had a duty to monitor the actions of the other four and to take appropriate action when serious breaches of trust became evident. The Hawaii attorney general also had oversight responsibility, as did the probate court and the master it appointed each year to review the trustees’ accounts. Furthermore, trust counsel were supposed to report serious trustee misconduct to the probate court, and Supreme Court justices who selected trustees arguably had on-going responsibility to monitor trustee conduct and to take action in the face of serious misconduct. Despite all this, obvious breaches of trust went unchecked for years.

PARENS PATRIAE. Beneficiaries of non-charitable trusts have legal standing to sue the trustees of their trusts. That enables such beneficiaries to hold trustees accountable. But charitable trusts technically lack beneficiaries other than the public-at-large. Rather than allow members of the public to sue trustees of charitable trusts, trust law bestows upon the attorney general of each state the power and the responsibility to represent the beneficiaries of every charitable trust. This concept is called parens patriae. Prior to publication of the “Broken Trust” essay, however, a series of attorneys general in Hawaii took no action against Bishop Estate trustees despite obvious breaches of trust.

PERSONAL CONFLICT OF INTERESTS. Shortly after the controversy reached a climax in mid-1999, the governor appointed as attorney general an individual whose wife had been an in- house lawyer for the trustees during the years of abuse and a named defendant on a billion-dollar lawsuit against the trustees. Explaining that he had gotten an opinion letter from the Office of Disciplinary Counsel (but declining to provide a copy), the new attorney general refused to recuse himself from Bishop Estate matters.

PERSONAL OR TRUST COUNSEL? According to the Restatement (Third) of Trusts, trustees can properly hire legal counsel for “personal protection in the course, or in anticipation, of litigation (e.g., for surcharge or removal).” Such lawyers are generally referred to as Personal Counsel, and should be distinguished from Trust Counsel who assist trustees in carrying out their fiduciary duties. Trustees are not required to disclose opinions obtained from Personal Counsel, but communications between trustees and Trust Counsel are subject to the general principle entitling a beneficiary to information that is reasonably necessary to the prevention or redress of a breach of trust or otherwise to the enforcement of rights under the trust. A court-appointed master criticized the Bishop Estate trustees and their trust-paid lawyers for not being clearer about each lawyer’s intended role. The master recommended that the court order some of the trustees’ lawyers to pay back millions in legal fees because those lawyers had been retained as Trust Counsel but functioned more like Personal Counsel.

POLITICAL INVOLVEMENT. Tax-exempt organizations are not supposed to involve themselves in political campaigns, yet Bishop Estate trustees systematically raised money for numerous political campaigns and paid questionable “consulting fees, retainers, and salaries” to key government officials.

PRIVILEGED MATTERS. Bishop Estate trustees took the position that anything said or done in the presence of the trust’s chief counsel, as well as any documents placed in his care, were automatically protected by attorney-client privilege. This definition was too broad. The privilege is potentially available with respect to communications, but only when the purpose of the communication is to obtain legal assistance.

PROSECUTORIAL OR JUDICIAL MISCONDUCT? Grand juries indicted, and twice re- indicted, two of the trustees for allegedly using their trustee position to enrich themselves and their relatives. Each time, the trial judge threw out the indictments on procedural grounds, and each time the attorney general appealed that judge’s decision. The primary problem was that a deputy AG had questioned Bishop Estate’s in-house counsel in front of a grand jury without first seeking a court’s permission to do so, or at least advising the witness that attorney-client privilege might be jeopardized if the deputy AG’s questions were answered. Five substitute Supreme Court justices upheld the trial judge’s decisions, ruling that the attorney general’s office had committed prosecutorial misconduct and prohibiting any further attempt to re-indict the trustees: “The State’s interest in prosecuting these crimes is, at this point, clearly outweighed by the lack of fundamental fairness that would ensure were we to allow these prosecutions to continue.”

PROGRAM ASSETS. Trustees are required to report the current value of the trust estate, using good-faith estimates as necessary. There is an exception, however, for “program assets” that the trustees use to carry out the trust’s charitable mission. Bishop Estate trustees do not report the current value of nearly 360,000 acres of non-income-producing land held in trust (including 63 miles of ocean frontage). They have taken the position that these are program assets being held “for educational purposes.”

PRUDENT INVESTING. Prudent investing generally requires an overall plan, due diligence prior to individual investment decisions, and regular monitoring of existing investments. Bishop Estate trustees reportedly made ad hoc investment decisions based on personal relationships, and without proper due diligence. For example, when Robert Rubin left Goldman Sachs to join the Clinton administration, he sold his partnership interest back to Goldman Sachs for $50 million, and then asked Bishop Estate to guarantee that amount. The trustees said yes despite not having the expertise needed to ascertain the trust’s exposure and to determine an appropriate price. They also invested tens of millions of dollars in complicated oil and gas exploration deals that individual trustees could not begin to explain during the depositions taken when they later sued the promoter.

PUBLIC CHARITY. When Mrs. Bishop wrote her will, Hawaii was an independent nation with its own tax laws. Now, however, the trust is subject to the Internal Revenue Code. Because Bishop Estate has a single benefactress, some people assume it is a private operating foundation. Bishop Estate, however, is a public charity because its charitable purpose is to operate a “school,” which is defined in the tax code as “an educational organization that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.” It is unclear to what extent the trustees can pursue other charitable purposes (e.g., outreach programs and land-conservancy activities) before the trust ceases to be classified as a school and

8 therefore becomes a private foundation for tax purposes. If it were a private foundation, tax law would require that the trustees expend a minimum of 5% of trust value each year. Even in the years following the removal of five trustees the amount spent in pursuit of Princess Pauahi’s charitable mission has never come close to 5% of trust value.

PUBLIC POLICY. Trustees should not be able to enter into private contracts that limit the ability of their successors to hold them accountable for harm done to the trust, yet Bishop Estate trustees managed to accomplish that. The successor trustees chose not to seek accountability because of “insured vs. insured” provisions in $75 million of liability insurance coverage the former trustees had purchased with trust funds. The new trustees’ lawyers—including some who had represented the former trustees—reportedly advised against seeking accountability or even cooperating with the attorney general’s office in its effort to hold the former trustees accountable, saying that it would jeopardize the insurance coverage. The new trustees, also concerned about the personal strain and financial cost of pursuing the former trustees and the former trustees’ lawyers, chose not to seek a declaratory judgment on the public-policy issue.

RACIAL PREJUDICE. Lawyers are ethically prohibited from attempting to appeal to racial prejudice when such actions would be prejudicial to the administration of justice. Yet a native Hawaiian attorney for the replacement Bishop Estate trustees seemed to be arguing in the courtroom that non-native Hawaiians in the attorney general’s office could not be trusted to act in the best interest of a trust that had special meaning for native Hawaiians. Deputy attorneys general—who were non-native Hawaiian—perceived this as “playing the race card.” Whether or not this was an impermissible appeal to racial prejudice was never resolved.

RECORDKEEPING. Trustees of charitable trusts have a duty to keep reasonably good records and to provide to the attorney general information necessary to protect the public interest. By contrast, Bishop Estate trustees appeared on several occasions to be concealing or destroying relevant evidence. For example, a trustee instructed a staff member under questionable circumstances to make sure that selected computer files could be deleted permanently. Shortly after telling the attorney general about the trustee’s demand, the staff member in question received an anonymous threat that prompted her to sell her home, move from Hawaii, and refuse to cooperate further in the investigation. On another occasion, a trustee neglected to provide documents that had been requested in a properly served subpoena (having to do with a politician’s use of a Bishop Estate credit card in casinos and strip bars). When a third party provided the attorney general with a copy of these documents, the trustee admitted that he had the originals, describing his failure to produce them as an inadvertent “mistake.”

RECUSAL. The Code of Judicial Conduct directs judges to disqualify themselves when their impartiality might reasonably be questioned, yet a probate judge whose husband was a partner in the law firm that represented the trustees recused herself only when a lawyer requested it in open court. Similarly, the five Supreme Court justices who had selected the Bishop Estate trustees declined to recuse themselves until the attorney general threatened to go public with the details of an ex parte conversation that she had with them about a legal issue that was before the court.

REGULAR ACCOUNTING. Although trustees have a duty to keep beneficiaries informed about the trust and Mrs. Bishop specifically instructed her trustees to publish an accounting in a

Honolulu newspaper each year, Bishop Estate trustees were notorious for providing inadequate information. For example, they routinely used wholly owned corporations to conduct business, but they did not provide consolidated financial statements or crucial details about the corporations. They also reported trust land at values that were 40 years old.

RELIANCE ON OTHERS. Trustees should not seek legal advice from lawyers who have a conflict of interests, nor should they put such a person in control of the flow of information within the organization. Yet when interim trustees replaced the ousted Bishop Estate trustees, they chose as their chief executive the person who had served for the past decade as the former trustees’ top in-house lawyer, and they sought legal advice from outside counsel who had advised the former trustees.

RELIGION. In her will, Mrs. Bishop directed that trustees of her trust and teachers at Kamehameha Schools always be members of the Protestant religion. In the 1960s, a court determined that the requirement that teachers always be Protestant did not violate anti- discrimination labor laws because the school was a private, religious school. In 1994, however, the 9th Circuit ruled that the Protestants-only hiring mandate violated the law because the school had evolved into a secular institution. State Supreme Court justices claimed for years to be following the letter of the will (appointing, among others, a lifelong Catholic who evidently “converted” to Protestantism on the eve of his selection, and a practicing Mormon who claimed to have received Protestant baptism as an infant). Eventually, however, the justices stopped considering religion entirely. Currently the probate judge selects trustees. The judge has declined to say whether religion is considered. It seemingly would be a breach of judicial ethics for a judge to discriminate on the basis of religion, regardless of the will’s mandatory language.

SECRECY. Bishop Estate employees had no choice but to sign confidentiality agreements. When a senior executive appeared poised to provide evidence of trustee misconduct to the authorities, the trustees fired him and got a court order that effectively muzzled him. A trial judge ruled that he could not give the documents even to the authorities. He wanted to appeal that decision but lacked the funds needed to do so.

SEX WITH A CLIENT. The Model Rules of Professional Conduct provide that “a lawyer shall not have sexual relations with a client unless a consensual sexual relationship existed between them when the client-lawyer relationship commenced.” Yet a lawyer for one of Bishop Estate’s wholly owned businesses reportedly had a sexual relationship with one of the trustees. This story within the story ended tragically: the lawyer committed suicide and the trustee attempted to do so.

SILENCING CRITICS. Judge Samuel King had achieved senior status but was still presiding over federal trials when he co-authored the Broken Trust essay. Lawyers working for the Bishop Estate trustees spent days researching and drafting a memo entitled “Limits on freedom of federal judge regarding public statements on social issues and conclusions of law”—an action that a court-appointed master described as a wholly inappropriate use of charitable trust funds. The master recommended that the judge order the trustees or their lawyers to reimburse the trust estate for such legal costs.

SIMULTANEOUS INVESTIGATIONS. The attorney general simultaneously directed civil and criminal investigations of the Bishop Estate trustees. She instructed members of the criminal team not to communicate about the case with members of the civil team, and vice versa. The criminal team secured a series of grand jury indictments, which the civil team offered as evidence in the civil action. Eventually a judge threw out all the indictments on procedural grounds and a panel of substitute Supreme Court justices ruled that there had been prosecutorial misconduct. (All of the regular justices had recused themselves because of obvious conflicts of interest.) One indicted trustee and members of his family sued the attorney general and selected deputies for alleged civil-rights violations and malicious prosecution. The action was dismissed in state court because of a global settlement that had abruptly ended the attorney general’s civil and criminal investigations.

SPLIT-PERSONALITY TRUST. Because Bishop Estate trustees engage extensively in business activities while simultaneously operating a public charity, many people view the trust as two separate organizations with two separate cultures: a business, Bishop Estate, and a charity, Kamehameha Schools. A succession of trade names suggests an evolution of self-identity: Bishop Estate eventually became Bishop Estate/Kamehameha Schools, then Kamehameha Schools/Bishop Estate, and finally Kamehameha Schools. Some observers call this name change “window dressing,” and contend that the trustees should become a true charity with only passive- investment assets in its endowment.

STANDING. There is a national trend toward granting legal standing to groups that have a special interest in a particular charitable trust when the state attorney general chooses not to take action despite indications of serious abuse. When it became clear that the system of oversight in Hawaii had broken down and that no one with legal standing was taking steps to hold the Bishop Estate trustees accountable, a group of Kamehameha Schools alumni, parents, students, and teachers asked for standing. Hawaii’s attorney general joined with the Bishop Estate trustees in successfully opposing those efforts.

TAX-EXEMPT STATUS. The former trustees apparently violated every condition of IRC section 501(c)(3) status: private inurement (excessive compensation and inappropriate side benefits), private benefit (sweetheart deals for friends and relatives), commerciality (overemphasis on non-charitable business activities), failure to pursue the charitable mission (less than 1% of estimated value expended on Kamehameha Schools each year), involvement in political campaigns (illegal assistance to, and direct involvement in, the campaigns of favored candidates), and self-serving lobbying activities (more than a million dollars of trust funds secretly spent lobbying against federal and state legislation that would limit how much the trustees could pay themselves in fees.

TRIAL PUBLICITY. Legal ethics sometimes limit what a lawyer can say to the media about matters that are being litigated. With this in mind, lawyers for the Bishop Estate trustees complained to the probate judge that media outlets were regularly quoting Professor Roth on how the judge should rule on specific issues, saying that it was having an inappropriate influence on the court. Because the ethical rule applied only to lawyers who were participating directly in the litigation, however, the probate judge took no action.

TRUSTEE SELECTION. Mrs. Bishop directed that Supreme Court justices select all her future trustees. For more than a century justices claimed to be selecting trustees while acting in a non-official capacity, as ordinary citizens. By the 1990s, justices appeared to be selecting trustees as political payback related to their own appointments to the Supreme Court. A few months after publication of the Broken Trust essay, the justices announced that they would stop selecting trustees, citing a “climate of public cynicism.” Currently the probate judge chooses all Bishop Estate trustees. Critics question whether a single probate judge can reasonably be expected to withstand the intense political pressures that appear to have influenced the actions of five Supreme Court justices.

UNDIVIDED LOYALTY. Trustees must act at all times solely in the beneficiaries’ best interests, and they must meet an unusually high standard of care and conduct. The duty of undivided loyalty includes a prohibition against acting out of self-interest—which Bishop trustees breached when they refused to step aside in order to save the trust’s tax-exempt status. The trustees called the IRS’s ultimatum “extortion.” It is easy to see how such a threat could be used maliciously, but whether it was fair to the trustees did not matter. The threat to the trust was real, and so the trustees were duty-bound to step down.

UNITRUST. According to Mrs. Bishop’s will, as interpreted by the Hawaii Supreme Court, the trustees are supposed to expend trust income annually on Kamehameha Schools, which implies a duty to invest assets so as to generate a reasonable amount of annual income. Yet for years the trustees invested primarily for growth rather than income, and secretly accumulated over $350 million of income in defiance of the will. Now, at the IRS’s insistence, the trustees expend annually approximately 4% of the trust’s endowment value (which does not include the trust’s non-income-producing land).

UNPRODUCTIVE ASSETS. Trustees have a duty to make the trust estate productive. Bishop Estate trustees, however, own nearly 360,000 acres of non-income-producing land worth billions of dollars. They do not list these parcels of land as investments; instead, they call them “program assets” and contend that they are being held indefinitely “for educational purposes.” Princess Pauahi expressed a desire that the trustees not sell her land “unless in their opinion a sale may be necessary for the establishment or maintenance of said schools, or for the best for the best interests of my estate.” Critics contend that the trustees should sell the land so they can educate more Hawaiian children, and that the trustees have a duty to do so.

WAIVER OF ATTORNEY-CLIENT PRIVILEGE. The Hawaii Supreme Court threw out criminal indictments against the former Bishop Estate trustees after ruling that grand-jury testimony violated the attorney-client privilege. The new trustees had waived the privilege for this limited purpose, but the justices said the question of who could waive the privilege (i.e., the former or current trustees) was an unresolved question in Hawaii that was best left for another day. Cases in other jurisdictions are mixed. For purposes of resolving the Bishop Estate matter, the justices’ ruling assumed, without so stating, that only the former trustees could waive the privilege.

WASTE. A court-appointed master concluded that the Bishop Estate trustees had wasted trust funds on lawyers who represented the trustees’ personal interests rather than those of the trust.

The master recommended that the successor trustees seek disgorgement of millions of dollars in fees already paid. Instead, the successor trustees paid $1 million for a “second opinion” from a law firm that advised the new trustees not to attempt to recover any of the fees, and indicated that it would be legally appropriate to rehire lawyers who had served the former trustees for many years. Critics contended that the $1 million cost of this legal opinion was itself a waste of trust resources.

WILL CONSTRUCTION. Mrs. Bishop’s will gives her trustees discretion “to devote a portion of each year’s income to the support and education of orphans, and others in indigent circumstances.” It is tempting to view this as a second charitable mission, one that is separate and apart from the primary mission of running Kamehameha Schools. So viewed, it would support any number and variety of outreach programs. But Hawaii’s Territorial Supreme Court ruled in 1910 that “support and education,” as used in Mrs. Bishop’s will, must be provided at the Kamehameha Schools: “The construction contended for by the [attorney general] that the support and education contemplated was to be furnished elsewhere than at the schools and that support can be furnished independently of education would require undue straining of the language used…. In our opinion the clause under consideration refers to support and education at the Kamehameha Schools only and not to support independently of education.”